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TSX soars to 15,109.25 to break closing record — finally

Canada’s main equity index booked a new all-time closing high on Wednesday, finally surpassing its previous record close set six years ago to the day and just weeks before the global financial crisis boiled over, but investors should hold the celebration

Canada’s main equity index booked a new all-time closing high on Wednesday, finally surpassing its previous record close set six years ago to the day and just weeks before the global financial crisis boiled over, but investors should hold the celebration.

The milestone reflects the index’s strength in recent months, but Canadian stocks remain laggards globally and have a long way to go before catching up to the rest of the world.

“It’s nice that it hit a record high, it makes everyone feel good,” said Norman Levine, managing director at Portfolio Management Corp. in Toronto. “But it doesn’t really mean very much.”

The S&P/TSX composite index climbed 0.35% or 53.36 points to end Wednesday at 15,109.25, 36 points higher than its previous peak close of 15,073, reached on June 18, 2008.

The six years it took to reach that point is longer than many other major indexes around the world took to break through their pre-crisis highs, including the S&P 500, which has repeatedly set new highs since first besting its 2007 high of 1565.15 in the first quarter of 2013.

Investors should also keep in mind that the TSX has yet to surpass its intra-day high of 15,154 reached on June 6, 2008.

Greg Newman, associate portfolio manager at The Newman Group, a division of ScotiaMcLeod in Toronto, said the index’s tough grind higher over the past six years was preceded by a period of relative strength in the years leading up to the financial crisis.

“The TSX with its exposure to metals, gold and oil and gas was a destination for global investors prior to the financial crisis,” he said. “Even after the subprime shocks first reverberated in the summer of 2007, investors viewed the TSX with its exposure to the emerging world and commodities as a good hedge to the troubles emanating from the U.S.”

Then, after markets bottomed in March 2009, the TSX had a nice run due to the Canadian dollar’s relative strength to the U.S. greenback and the view that emerging markets were in better shape than the developed economies of America and Europe, Mr. Newman added.

From there, however, the TSX’s significant concentration in resource stocks turned from gift to curse and the index badly lagged its global counterparts, especially the S&P 500, which outperformed its northern counterpart by a 75% margin through last year.

At the end of the day, it’s a stinky index

“In no particular order, the troubles included the BRICs, the Fragile 5, falling gold, lack of energy infrastructure and wide oil and gas price differentials,” Mr. Newman said. “All these events together conspired to cause underperformance.”

It didn’t help that BlackBerry Ltd., Canada’s tech darling, flamed out during this same stretch and lost 95% of its market capitalization.

But some sectors of the TSX did exceptionally well over the past six years, including REITs, industrials and telecom, which have all more than doubled off the bottom and hit new highs last year.

More recently, the broader index has also performed well, rising 10.5% this year versus 7.5% by the S&P 500.

Mr. Newman said Canadian stocks now offer investors good relative value, especially in the energy sector, while the lower Canadian dollar is attracting more international investors as unrest grows elsewhere.

“Crimea and Iraq, I believe, are forcing politicians and investors to take a more constructive view on resource development which is favouring energy and pipeline stocks,” he added.

“Finally, the Canadian banks with their relatively low PEs, high dividends, low payout ratios, high ROEs and respectable growth rates are also attracting capital in a climate that is more confident of a real-estate soft landing.”

Many observers, including Barry Schwartz, chief investment officer at Baskin Financial Services in Toronto, believe the TSX will maintain momentum and rally even higher in the weeks ahead if commodity prices improve and Canadian bank stocks continue their solid performance.

But given the index’s lack of diversification, Mr. Schwartz remains pessimistic about its longer-term prospects and recommends investors look around to better diversify their holdings.

“It’s very easy to see the TSX blow past 15,000 to 17,000 … but at the end of the day, it’s a stinky index,” he said. “I’m much more comfortable owning a more diversified basket of stocks in my portfolio.”